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This Downturn Will Stress-Test Roper's Differentiated Business Model

May 05, 2020 4:38 PM ETRoper Technologies, Inc. (ROP)5 Comments
Stephen Simpson profile picture
Stephen Simpson


  • Roper seems likely to see far less damage to its revenue and profit trajectory during this downturn, as a substantial amount of revenue/profit comes from subscription/recurring sources.
  • There will be areas of weakness, particularly in Process and possibly including some medical and construction businesses, but Roper doesn't have much problematic end-market exposure.
  • Explicitly modeling M&A increases modeling/valuation risk, but it's too significant to the business to ignore.
  • Roper seems priced for a high single-digit long-term shareholder return; not the best return available, but likely with substantially less underlying business volatility.

I’d been getting more comfortable with Roper Technologies’ (NASDAQ:ROP) valuation recently, and the shares have held up extremely well so far this year, as the company’s strong recurrent revenue model is likely to see the company pass through this downturn with far less disruption than its industrial peer group. The question remains whether industrials are really a valid peer base anymore, but I don’t expect that to constrain the stock’s popularity.

My model assumes significant ongoing M&A, and there is now increased timing uncertainty on that, but I see little to disrupt the basic model. With an ongoing focus on niche-type businesses with barriers to entry, low maintenance capex needs, and low overall asset needs, I expect Roper to continue generating excellent free cash flow margins and free cash flow growth, even though the shares do otherwise look expensive on its organic growth numbers.

A Healthy Beat

With so much of Roper’s business leveraged to software and other recurring revenue streams, not to mention end-markets like health care and traffic management, there really isn’t a good peer group for comparisons anymore. While Roper did join its industrial “peers” with a healthy beat on first-quarter revenue (close to 5%), the organic growth of 4% was quite a bit better than the average industrial showing of around 4% contraction. Roper also did quite well on the segment operating level, beating expectations more than $0.10/share.

All of Roper’s segments produced organic growth this quarter, with Network Software & Systems (or NSS) up 9%, Application Software up 5%, Measurement & Analytical up 3%, and Process up 10%. Segment profits rose 3%, with a 60bp year-over-year margin decline. Measurement & Analytical and Process were the weaker performers, down 3% and 14%, respectively, while NS&S and Application Software grew 13% and 7%, respectively.

Roper once again

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (5)

What I would term “expensive precision engineering” was the basis of this company a couple of decades ago, and formed the foundation for its very successful partial-transformation into a software and services business. I greatly admire the way that vertical-industry specialized niche businesses have been brought under the Roper umbrella. But the stock price is scary high.

Looking at the future outlook for more acquisitions, ROP is likely to be highly constrained by the huge amount of goodwill on its balance sheet, amounting to about $9 billion of its $18 billion assets as of 12/12/19. In fact the water on the balance sheet is about equal to the stockholders’ equity – deduct the goodwill from the assets, and the stockholders would be left with close to zero. This unlikely impairment may not worry the stockholders, but it’s a problem for ROP in raising more debt for future M&A.

And at the same time what’s left of the “expensive precision engineering” side (about 30% of the company) is subject to the same invidious trend in which complicated pumps, controls and other precision mechanical devices are being replaced by cheap, simple substitutes. The high-value-added complicated bits are replaced by control software, not necessarily coming from the same firm. (This trend is keeping me away from CMI, ALSN and others). I’m keeping ROP stock on my “buy the dip” list, preferably a big dip.
Stephen Simpson profile picture
"Looking at the future outlook for more acquisitions, ROP is likely to be highly constrained by the huge amount of goodwill on its balance sheet ... but it’s a problem for ROP in raising more debt for future M&A. "

Or ... not.

Which other names do you see which trade at more discount? :)
Are you talking about AME, FTV, TDY, TMO? Or do you mean other branches?

What I see at ROP at the moment: a recession-resistant business model. A fair forward PE compared to history and especially considering the high FCF conversion, stability in revenues and track record of management.
Imo ROP offered a good chance to get in at $310 and that was exaclty what I did. I think the company will further increase FCF and stay asset-light which is something I appreciate
Guraaf profile picture
Super useful article and interesting to see you coming around to accept the elevated valuation levels that never seem to come down.
Stephen Simpson profile picture
Explicitly modeling M&A makes a big, big difference.
It's also another good reminder that the normal relationships between valuation drivers and valuations tend to break down on the extremes (same thing happens w/ banks; exceptionally high/low ROTCEs deviate substantially from the normal valuation parameters).
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